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It is quite common for taxpayers to resort to tax evading measures to save their tax outflow to the Government. It is necessary for the Government to keep a tab on such measures by having provisions in law or introduce new provisions / modify the existing ones in order to curb this practice.
When people started evading tax on capital gains by not declaring their profits on the sale of stocks, the Finance Act, way back in 2004, introduced a tax called the Securities Transaction Tax (STT) as a means of clean and efficient way of collecting taxes from financial market transactions.
STT is a kind of financial transaction tax which is similar to tax collected at source (TCS). STT is a direct tax levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India. STT is governed by Securities Transaction Tax Act (STT Act) and STT Act has specifically listed down various taxable securities transaction i.e., transaction on which STT is leviable.
Taxable securities include equity, derivatives, unit of equity oriented mutual fund. It also includes unlisted shares sold under an offer for sale to the public included in IPO and where such shares are subsequently listed in stock exchanges. STT is an amount to be paid over and above transaction value and hence, increases transaction value.
As already mentioned STT is leviable on taxable securities transaction. STT Act has also provided for value of transaction on which STT is required to be paid and person who is responsible to pay STT i.e., either buyer or seller. However, rate of STT will be decided by Government and modified from time to time if necessary.
Provisions of collection of STT works similar to TCS or TDS. STT is required to be collected by a recognised stock exchange or by the prescribed person in the case of every Mutual Fund or the lead merchant banker in the case of an initial public offer, as the case may be, and subsequently payable to the Government on or before the 7th of the following month. In case the above persons fail to collect the taxes, they are still obliged the discharge an equivalent amount of tax to the credit of Central Government within 7th of the following month. Further, failure to collect or, remit whatever has been collected will result in levy of interest and penal consequences too.
While the term ‘securities’ is not defined under STT Act, STT Act specifically allows borrowing of definition of such terms not defined in STT Act but defined in Securities Contracts (Regulation) Act, 1956 or Income-tax Act, 1961. The term ‘Securities’ is defined in Securities Contracts (Regulation) Act and includes the following:
Hence, securities include all of the above the purpose of STT levy that are traded on recognized stock exchange. Off-market transactions are out of the purview of STT.
|Taxable securities transaction||Rate of STT||Person responsible to pay STT||Value on which STT is required to be paid|
|Delivery based purchase of equity share||0.1%||Purchaser||Price at which equity share is purchased*|
|Delivery based sale of an equity share||0.1%||Seller||Price at which equity share is sold*|
|Delivery based sale of a unit of oriented mutual fund||0.001%||Seller||Price at which unit is sold*|
|Sale of equity share or unit of equity oriented mutual fund in recognised stock exchange otherwise than by actual delivery or transfer and intra day traded shares||0.025%||Seller||Price at which equity share or unit is sold*|
|Derivative – Sale of an option in securities||0.017%||Seller||Option premium|
|Derivative – Sale of an option in securities where option is exercised||0.125%||Purchaser||Settlement price|
|Derivative – Sale of futures in securities||0.01%||Seller||Price at which such futures is traded|
|Sale of unit of an equity oriented fund to the Mutual Fund – Exchange traded funds (ETFs)||0.001%||Seller||Price at which unit is sold*|
|Sale of unlisted shares under an offer for sale to public included in IPO and where such shares are subsequently listed in stock exchanges||0.2%||Seller||Price at which such shares are sold*|
|PURCHASE OF UNITS OF EQUITY ORIENTED MUTUAL FUNDS||NIL||PURCHASER||NA|
* Please referRule 3 of Securities Transaction Tax Rules, 2004 for the manner of determining value of taxable equity or Equity oriented mutual fund transactions.
Derivative contracts are generally settled in cash which means, stocks are not physically delivered and only the profits are paid and received by the contracting parties. These transactions, as given in the table above, are subject to an STT levy of 0.001 percent. However, SEBI had in its Circular dated 11.4.2018 listed around 46 stocks, in respect of which derivative contracts would be settled by way of physical delivery of shares as against cash. However, no clarity emerged on the rate of STT that would apply to these kinds of transactions.
Further, for such transactions, the stock exchanges began to levy an STT of 0.1 percent (this is the rate of STT for delivery based equity share transaction), which is almost 10 times of what is levied for derivative contracts settled in cash. Hence, a petition was lodged by the Association of National Exchange Members of India (ANMI) against the stock exchanges before the Bombay High Court to address the aforementioned concern of levy of 0.1 percent of STT on physical delivery of derivatives.
The High Court has sought the comments of the Central Board of Direct Taxes (CBDT) in this regard. The CBDT, in response, has issued a clarification dated 27 August 2018, where it has observed that where a derivative contract is being settled by physical delivery of shares, such transaction would be similar to a transaction in equity shares where the contract is settled by actual delivery of shares. Therefore, the STT rate as applicable to delivery based equity transactions would apply to such derivative transactions too.
Tax on capital gains
When STT levy was introduced in 2004, simultaneously new Section 10(38) was introduced to benefit taxpayers who would incur STT. As per Income-tax Law, for transactions undertaken until 31 March 2018, any capital gain on sale of shares or equity oriented mutual fund units (EOMF) which are subject to STT is taxed at beneficial/Nil rate.
While long term capital gain (if shares or EOMF are held for > 12 months) are exempt from tax, short term capital gain on such securities are taxed at concessional rate of 15%. However, in order to prevent abuse of exemption provisions by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions, Finance budget 2018 proposed to withdraw the exemption on long term capital gain and tax long term capital gains on equity shares and EOMF at concessional rate of 10% with respect to transfer effected on or after 1 April 2018.
However, gains accrued till 31 January 2018 are grandfathered i.e., in case of transfers upto 31 January 2018, cost of acquisition of shares or EOMF acquired before 1 February 2018 will be replaced by fair market value as on 31st January 2018.
Tax on business income
In case of person who is trading in securities and offering income/loss from such trading as business income, STT paid is allowed to be deducted as business expense.